Arbitrage Graph

I've been meaning to make this for a while now, but I never got around to it. Then today someone on the Yahoo! boards was dooms-day preaching about how the arbitrage has never been this far out of whack. Sure it's pretty unsettling, but the deal has seen darker pessimism than today.

People read too much into the arb play. The gap'll definitely close when the merger is official. In the meantime the merger has not been finalized and it'll stay volatile until that happens. I hope it's sooner, but I think we still have a couple weeks yet.

When I was a broker years ago, one of the first lessons I learned was that people buy stocks for only one of tw0 reasons. Fear and greed. Now that's not why people invest generally, but in selecting individual stocks, it always boils down to fear and greed.

Either we fear we will miss an opportunity that will never come again, or greed gets the best of us and we chase stocks higher. What does this have to do with Sirius? Everything!

I'm looking at the arbitrage spread and it's absolutely baffling. It seems to be working in reverse. Now typically, this indicates the street's belief that a merger will not go through. Ideally, if arbitrage players were shorting sirius and buying xm, siri should be down and xmsr should be up. Yet, Sirius is showing strength as xmsr is being sold off. It doesn't make sense. Not with all the talk of the merger being all but done. I suppose there is a chance that the F.C.C. could shoot it down. I just don't think that is what's happening here...

Greed... In the event of approval from the FCC, the arbitrage spread offers a fixed return on an investment. It could be 10 - 20%. It doesn't matter. It's fixed. The price targets on sirius by such firms as Bank of America, offer a much higher rate of return than the arbitrage play. I'm talking 300% or more. Sirius could return 20% simply by rising to 2.34 from 1.95.

Fear....There is a chance that the FCC will not approve the merger. In which case, those short sirius would have to cover as their xm long position fell off a cliff. At these levels and at this point of the "game" there is very little downside risk to owning sirius. And a short position would have paid for itself at this point. Owning xmsr however involves a higher amount of risk.

People read too much into the arb play. The gap'll definitely close when the merger is official. In the meantime the merger has not been finalized and it'll stay volatile until that happens. I hope it's sooner, but I think we still have a couple weeks yet.

Yeah that's certainly volatility if I've ever seen it. I haven't actually bothered to look, but I'm sure other buy-outs there is a much steadier slope upwards to the close....and it probably doesn't drag out over 500 calendar days.

It's not really useful. I just trying to point out how arbitrarily it appears to go from highs to lows over time. Yesterday it seems everyone was citing the arb spread as evidence that deal had come apart, and the chart shows that it has been "there" before and we're still going (strong).